Chinese Equity Rebound Fizzles as Bond Yields March Higher

(Bloomberg) -- A rebound in Chinese stocks is proving short-lived.

Hong Kong and Shanghai shares were little changed on Thursday after rallying in the previous two days on optimism China’s government would ramp up spending to offset the impact of U.S. tariffs. While speculation state-backed funds were buying shares had added to the upbeat sentiment, as did comments by Premier Li Keqiang that there would be no yuan devaluation, other factors are less supportive of a sustained rally.

Turnover in both markets is still near historically low levels, showing little pickup in trader interest. A closer look at some of the top gainers in Hong Kong suggests increases were driven by investors seeking to cover short bets. Great Wall Motor Co. and BYD Co., which both jumped more than 7 percent, were the two most shorted stocks on the Hang Seng China Enterprises Index. Inflows are also likely to wane as public holidays shut down exchange trading links between the city and the mainland for most of the next two weeks.

Attention is likely to shift to the widely expected rate increase by the Federal Reserve next week, as well as the rising Treasury yield, which has helped drive the benchmark Chinese government bond yield to a four-month high of 3.7 percent. While markets globally experienced a relief rally on news the U.S. will initially impose only a 10 percent tariff on $200 billion of Chinese goods, there’s little sign relations between the world’s two largest economies will improve any time soon.

"The recent rally is mostly driven by technical factors like short covering," said Qiu Zhicheng, a Hong Kong-based strategist at ICBC International Research Ltd. "Market sentiment is still being weighed down by the trade war, rising dollar and looming rate hike in the U.S."

The Hang Seng China Enterprises Index added 0.2 percent at 1:37 p.m. in Hong Kong, while the Shanghai Composite Index dropped less than 0.1 percent. Industrial and energy companies, which had led the gains earlier in the week, were among the biggest losers. News that China plans to cut the average tariff rate that it charges on imports from the majority of its trading partners had little impact.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net;Jeanny Yu in Hong Kong at jyu107@bloomberg.net

To contact the editor responsible for this story: Richard Frost at rfrost4@bloomberg.net

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